More trouble for Kraft Heinz: Its bonds could soon be rated junk

Stock sinks after dismal earnings report

By Paul R. La Monica, CNN Business

Posted: 2:55 PM, August 12, 2019Updated: 2:55 PM, August 12, 2019

Alex Wong/Getty Images via CNN

Fitch revised its rating outlook on Kraft Heinz to "negative" on Monday. That means that the next move could be a downgrade. The company's bonds are currently rated "BBB-" by Fitch — the lowest rating that is still investment grade.

(CNN) - The problems facing Kraft Heinz are growing.

The stock sank last week following a dismal earnings report. Now, credit ratings agency Fitch is warning that the company's bonds could get downgraded to junk status if things don't turn around.

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Fitch revised its rating outlook on Kraft Heinz to "negative" on Monday. That means that the next move could be a downgrade. The company's bonds are currently rated "BBB-" by Fitch — the lowest rating that is still investment grade.

Fitch analysts said in a report that "growth trends remain challenging" for Kraft Heinz and other big food companies "due to brand maturity and changing consumer preferences."

Fitch is also worried about "the lack of pricing power" in the food business due to consolidation in the supermarket sector and increased shifts in the food business toward discount retailers such as Amazon, Walmart and Target.

Kraft Heinz had no comment when asked by CNN Business about the Fitch report.

A downgrade into junk level would be bad news for the Kraft Heinz, a global giant that sells dozens of food brands like Kool-Aid and Jell-O in addition to its namesake cheese and ketchup products.

Lower credit ratings make life financially tougher for debt-laden companies, because it raises their interest expenses. Kraft Heinz had nearly $30 billion in debt, as of June. Companies with weak credit ratings often also find it harder to raise more cash by selling new bonds.

Warren Buffett hurt by the problems at Kraft Heinz

Both S&P and Moody's also have Kraft Heinz debt rated one level above junk territory. S&P downgraded Kraft Heinz in June, citing a "diminished" outlook for the company's brands.

Kraft Heinz has struggled to adapt to changing consumer tastes during the past few years.

The company has been focusing more on cost cutting and less on introducing innovative new food products. That's a key reason why earnings and sales have fallen.

Kraft Heinz has also had to deal with an accounting probe from the Securities and Exchange Commission and the company recently restated earnings from 2016, 2017 and parts of 2018 following an internal review of its books.

The company is a significant holding of both Warren Buffett's Berkshire Hathaway and private equity firm 3G. Miguel Patricio, a long-time executive at Anheuser-Busch InBev, another company controlled by 3G, recently took over as CEO of Kraft Heinz and has promised to focus more on new products.

But will it be too little too late?

Kraft Heinz has taken numerous writedowns in the past year to reflect the lower value of mainstay products such as Kraft macaroni and cheese, Oscar Mayer lunch meats, Miracle Whip, Philadelphia cream cheese and Maxwell House coffee.

Shares of Kraft Heinz fell 2% Monday and the stock is now down 40% this year. The plunge has wiped out more than $5 billion in the value of Berkshire Hathaway's stake in Kraft Heinz.